Chapter 21
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| thrift institution | show 🗑
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| show | To accept deposits and channel the funds for mortgage loans
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| show | Savings banks and savings and loan associations. S&Ls are the most dominant.
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| How are savings institutions classified? | show 🗑
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| show | allows SIs to obtain additional capital by issuing stock
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| show | Provide them with greater potential to benefit from their performance. Divdidends and/or stock price of a high-performance instituion can grow, therby providing direct benefits to the shareholders.
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| show | Because of the difference in owner control, they are more susceptible to unfriendly takeovers. management doesn't hold all voting rights.
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| show | A mutual SI is converted to a stock owned SI in an acquisition. The acquiring firm then arranges to purchase the existing stock to be acquired. The acquiring institution purchases the stock.
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| Can the SI stil maintain its operations when it has been acquired by a commercial bank? | show 🗑
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| show | It has caused the number of mutual and stock SIs to decline consistently over the years. There are less than half as many SIs today as in 1994.
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| show | The total assets of stock SIs have more than doubled since 1994, while the total assets of mutual SIs has remained steady.
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| show | Regulated at both the state and federal levels.
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| Who regulates federally chartered SIs? | show 🗑
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| Who regulates state chartered SIs? | show 🗑
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| Deposit Insurance Fund (DIF) | show 🗑
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| show | formerly insured SIs and the Bank Insurance Fund (BIF), which had insured savings banks. The FDIC charges the SIs annual insurance premiums, which are placed in the DIF. If an SI fails, the FDIC uses funds from the DIF to reimburse depositors.
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| show | Monitored using the CAMELS rating. Assessed according to their capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to mk conditions. If an SI gets a CAMELS rating of 4 or up, it is named a "problem" and recieves attention.
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| show | In recent years, SIs have been granted more flexibility to diverisfy the products and services they provide. Have merged with other businesses specializing in real estate, insurance, and brokerage.
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| What are SIs' main sources of funds? | show 🗑
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| show | SIs obtain most of their funds from a variety of savings and time deposits, including passbook savings, retail CDs, MMDAs.
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| What happened in 1981? | show 🗑
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| show | this creation allowed SIs to offer limited checking combined with a mkt-determined interest rate and therefore to compete against money mkt funds. increased the sensitivity of SIs' liabilities to int rate movements.
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| show | 1- borrow from other depository institutions have excess funds. int rate = federal funds rate. 2- borrow through Repo agreements, commits to repurchase their govt securities at a later date. 3rd- can borrow at the Federal Reserve. not as common as others
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| What is SIs' capital generally composed of? | show 🗑
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| show | cash, mortgages, mortgage-backed securities, other securities, consumer and commercial loans, and other uses.
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| show | Used to satisfy reserve requirements enforced by the Federal Reserve System and to accommodate withdrawal requests of depositors.
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| show | Mortgages. typically are long term and can usually be prepaid by borrowers. 90%= family homes 10%= commerical properties. Can be sold in secondary mkt. mkt value changes in response to int rate mvmts, subject to int and credit rate risk
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| show | all SIs invest in T-bonds and corporate bonds because they provide a high liquidity, as they can be quickly sold in the secondary mkt if funds are needed.
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| How did the DIDMCA and Garn-St. Germain Act help with the lending capacity of SIs? | show 🗑
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| How does investing in commerical and consumer loans reduce SIs exposure to int rate risk? | show 🗑
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| Where on the balance sheet are the sources and uses of SIs' funds? | show 🗑
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| show | liquidity risk, credit risk, and interest rate risk. Their exposure to risk varies from those of banks.
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| Liquidity Risk of SIs | show 🗑
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| show | An alternative way to remedy a probblem of insufficient liquidity is to sell assets in exchange for cash. SIs can sell Treasury securities/mortgages in 2nd mkt. This will reduce the SIs' size and possibly its earnings. typically resolved w/ inc liabilitie
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| What is the main reason SIs have credit risk? | show 🗑
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| show | During the 1980s when int rate increased alot. SIs had a heavy concentration of fixed-rate mortgages, while their liabilities were mostly rate sensitive.Difference b/t int rev and int exp narrowed when int rates increased. Loan defaults higher as a result
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| How is interest rate risk measured? | show 🗑
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| show | Can be managed through adjustable-rate mortgages, interest rate futures contracts, and interest rate swaps.
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| show | int rates on ARMs are tied to mkt-determined rates such as 1 yr T-bill rate and are periodically adjusted in accordance w/ the formula stated in the ARM contract. enable SIs to maintain a more stable spread btw int rev and int exp.
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| What do ARM's reduce and expose? | show 🗑
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| Interest Rate Futures Contracts | show 🗑
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| What type of security do SIs use in interest rate futures contracts? | show 🗑
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| What happens to the mkt value of securities represented by the futures contract when interest rates rise? | show 🗑
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| Interest Rate Swaps | show 🗑
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| What happens to the outflows and inflows in interest rate swaps in a rising rate environment? | show 🗑
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| show | It is virtually impossible to completely eliminate risk. Homeowners often pay off mortgage bef maturity w/o much advance notice to SI. don't know the actual maturity of mortgages they hold and can't perfectly match the int rt sensitivity of their a & L.
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| Who do SIs compete with? | show 🗑
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| How are SIs valued? | show 🗑
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| show | Economic growth, change in the risk-free int rate, change in industry conditions and change in managment abilities.
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| What does economic growth do to SIs' cash flows? positive correlation | show 🗑
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| show | If the rf int rate decreases, other mkt rate may decline, and may result in a stronger demand for the SIs loans. W/ fixed rate loans, when int rates fall, an SIs cost of obtaining funds decline more than the decline in the int earned.
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| How do changes in industry conditions affect SIs' cash flows? unknown correlation | show 🗑
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| How do changes in managment abilities affect SIs' cash flows? (positive correlation) | show 🗑
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| show | risk premiums and the risk free rate.
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| show | an increase in the risk free rate results in a higher return required by investors. A substantial increase in inflation/budget deficit results in lower valuations of SIs.
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| How does a change in the risk premium affect SIs required rate of return? | show 🗑
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| show | SIs' value is favorably affected by strong economic growth, a reduction in interest rates, and high-quality management.
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| What are some of the reasons for the credit crisis of the late 1980s? | show 🗑
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| show | increased penalties for officers of SIs convicted of fraud, revised the SIs regulations, & raised the capital requirements for SIs. Allowed commercial banks to acquire SIs. SIs were required to sell any junk bond holdings & can't invest in them in future
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| Resolution Trust Corporation (RTC) | show 🗑
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| show | SIs offered subprime mortgage loans, which were granted to borrowers who didnt qualify for conventional mortgages. Many were aggressive and originated loans w/o assessing creditworthiness. When house prices dropped, mortgages worth more than house.
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| Credit Unions | show 🗑
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| show | They accept deposits from their members w/ excess funds and channel most of the money to those members who want to finance the purchase of a car or other assets.
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| show | B/c CUs don't issue stock, owned by depositors. The deposits=shares, and int paid on deposits is called a dividend. Income is not taxed. Generally very small. Objective is to satisfy its members.
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| Advantages of Credit Unions | show 🗑
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| show | employees may not have the incentive to manage operations right. Common bond req for membership restricts CU from growing beyond the potential size and limits the CU from diversifying. Can't diversify geographically b/c all members live in same area.
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| show | They have been merging. Some CUs now draw their members from a number of employers, organizations, and other affliations. Also trying to diversify their products by offering traveler's checks, money orders, and life insurance to their members.
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| What are credit unions sources of funds? | show 🗑
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| show | Central Liquidity Facility (CLF) acts as lender for CUs to accomodate seasonal funding and specialized needs or to boost the liquidity of troubled CUs.
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| show | Use the majority of their funds for loans to members. Loans finance cars, home improvements, and other personal expenses. Some CUs offer long-term mortgages loans, but many prefer to avoid these. CUs purchase govt & agency securities to keep liquidity.
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| Who supervises and regulates Credit Unions? | show 🗑
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| How is risk assessed for CUs? | show 🗑
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| How are CUs insured? | show 🗑
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| show | liquidity, credit, and interest rate risks.
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| How does liquidity risk differ for CUs than other depository institutions? | show 🗑
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